Latin Finance - November/December 2011 - 36

sub-sovereign debt

Cause for Concern
by Ivan Castaño exico’s short and long-term sub-national debt levels have skyrocketed since the 2009 global recession, triggering several rating downgrades and forcing the federal government to act before the situation deteriorates further. In comparative terms, Mexican state debt levels may not be that high. But the lack of transparency about local government books and banks’ exposure to such entities is a cause for concern at a time when sub-sovereigns are spending more despite limited flexibility in how they can meet their obligations. Tax authorities’ recent discovery that several regions have underreported short-term liabilities served as a wakeup call and encouraged both banks and government officials to respond after several high profile restructurings, most notably the State of Cohahuila. Banks’ increased exposure to municipalities and states has left some analysts wondering whether this has the potential to become a more widespread problem, both for banks and the government. Mexican banks Interacciones, Banorte and BBVA Bancomer hold the bulk of Mexico’s state debt, analysts say. Officials at all three banks would not comment on the situation. Moody’s Adrian Javier Garza, assistant vice president and credit analyst at Moody’s sub-sovereign group in Mexico, hopes Coahuila’s scandal pushes the central government to demand more transparency from states’ reporting methods. “This increased use of short-term debt is starting to generate financing risks,” he warns. “At some point, banks are not going to be willing to roll over loans or extend maturities.” Banorte – which participated in Coahuila’s recent restructuring – had

Underreported debt loads by Mexican state governments has alarm bells ringing. The federal government and banks are moving to contain the damage.

Taking a closer look at sub sovereign debt about 17% of its loan book dedicated to government entities as of end June 2011, up from 11% at the end of 2008, according to analysts at Deutsche Bank. In the wake of the restructuring, Banorte said it would institute new capital reserve requirements to cover losses from loans to states and municipalities. The bank has already refinanced some 13.21 billion pesos ($961 million) of debt extended to the states of Aguascalientes, Sonora and Coahuila, representing 4% of its total loan portfolio. More such restructurings are likely. reality have some 32 billion pesos ($2.3 billion) of short-term debt on their books, but they have only reported 8.3 billion pesos of that. This comes at a time when states are spending well beyond their means. “Annual revenues have grown 0.03% in the past five years but expenses have risen 3.5%,” says Gerardo Carillo, director of public finance at Fitch Ratings in Mexico. “This is why many states have taken so much short-term debt. The problem is they have not used it properly.” According to Carillo, states are allowed to take on short-term loans to compensate for sudden liquidity shortfalls. However, many have used these loans to fund longterm infrastructure projects and other expenses. This is because under current laws, they don’t have to report the loans to federal authorities, essentially giving

Wide Discrepancies

While such numbers are not insignificant, the real problem lies with discrepancies between reported and real debt loads. For instance, analysts say Mexican states in

36 LatinFinance

November/December 2011

Latin Finance - November/December 2011

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